www.pwc.co.uk
China’s agricultural
challenges
Roads to be travelled
October 2015
Foreword
Since reforms began some four decades ago, the world’s attention has been focussed on China’s rapid
economic growth.
However, an equally fascinating story has been unfolding that holds more profound significance for
people both within and beyond the China’s borders.
Indeed, until recently, very little attention outside China has been devoted to understanding the
agricultural industry that has effectively fuelled the workforce that has underpinned the country’s
economic miracle of recent decades. Still less has been devoted to the increasingly urgent question of
how the country will meet its future nutritional needs.
This paper has been produced jointly by PwC UK’s China Business Group and Agribusiness team. In
recognition of the importance of this topic we have produced this paper to highlight the most
significant of the challenges and opportunities presented by China’s evolving agricultural and
nutritional needs.
We hope it will stimulate discussion with regard to the economic, environmental and social
ramifications of these issues and inspire action to address challenges and capitalise on opportunities.
Furthermore, we would welcome the opportunity to discuss the issues raised in this paper with you
and may be reached via the contact information provided below.
Yours sincerely
Suwei Jiang
PwC Partner, China Business Group
Richard Ferguson,
Agriculture Advisor to PwC
PricewaterhouseCoopers LLP, 1 Embankment Place, London WC2N 6RH
T: +44 (0) 20 7583 5000, F: +44 (0) 20 7212 4652, www.pwc.co.uk
PricewaterhouseCoopers LLP is a limited liability partnership registered in England with registered number OC303525. The registered office of
PricewaterhouseCoopers LLP is 1 Embankment Place, London WC2N 6RH.PricewaterhouseCoopers LLP is authorised and regulated by the Financial Conduct Authority
for designated investment business.
Contents
Summary
1
China and agriculture: Roads to be travelled
2
Consumption
3
Supply
9
Supply constraints
13
Government and the agriculture sector
21
About PwC
25
Global Agribusiness Network
25
China Business Group
25
PwC Contacts
25
Roads to be travelled
PwC  Contents
China’s agricultural challenges
Summary
Evidence of an economic slowdown in China is
demonstrated clearly by the leading indicators of
falling commodities prices. Soft commodities prices
have paralleled the decline of copper, oil and gas in
recent months. But there is a significant difference
between them. China is likely to shift its economic
emphasis from a high-investment, export-driven
model towards one spurred by domestic
consumption. In crude, almost simplistic, terms,
manufacturing and infrastructure spending slows
while a service-led economy emerges over time. Thus,
while there might be some short-term adjustment,
growing affluence should remain the norm. In short,
the need to build bridges, highways and commercial
property will become less prominent but diets will
continue to change. This will place enormous burdens
on an already challenged domestic food system and
have significant ramifications on international trade
in agriculture.
The average Chinese eats some 57kg of meat a year,
an increase of 11kg from 2003 when some 46kg per
person was consumed. If Chinese meat consumption
mirrors other developed Chinese societies over time,
we can assume Taiwan’s current 74kg consumption is
a realistic long-term extrapolation. To satisfy this
increased consumption, China will require an
additional 94mn tonnes of corn and soybeans for
feedstock. In turn, this will require an additional
15mn hectares of agricultural land – an area the size
of England and Wales – which China simply does
not have.
Increasing meat consumption has manifested itself in
China losing its near self-sufficiency in soybeans – a
key feedstock. While it was barely self-sufficient in the
1970s and 1980s, from the late 1990s, Chinese
imports of soybeans have steadily increased and now
represent 87% of consumption. Corn – the other
major feedstock – is at the beginning of a trajectory,
which will likely prove similar to the experience of
soybeans. China now imports a small quantity of corn
compared to the past when it was self-sufficient.
Simultaneously, wheat and rice – the main food crops
for human consumption – are just self-sufficient.
Roads to be travelled
These demand pressures have been augmented by
supply-side constraints such as diminished farmland,
polluted rivers, depleted aquifers, overuse of
fertilisers, unclear ownership of farmland and an
archaic legal code. Fixing these takes time, capital and
effort, which is why the Chinese government is
tackling these challenges with a broad range of
measures. Recent policy schemes include the
liberalisation of leasing activity, the promotion of
large-scale mechanised farms, tackling land and water
pollution and the restructuring of
agricultural subsidies.
As agriculture modernises, companies, which through
technology can transform yields, enhance output or
allocate resources more efficiently, will make
significant gains. So too will companies that can
deliver secure, safe and sustainable sources of food.
Global firms that can provide services such as digital
mapping, soil analysis, precision farming, waste
management, traceability and so on will find
substantial opportunities.
Self-sufficiency is no longer a practical policy goal for
China. The government appears to recognise with its
priorities shifting towards high-value crops, such as
fruits and vegetables, and a focus on quality and food
safety. Simultaneously, China is venturing overseas to
bolster its food security though investments in foreign
farmland and the acquisition of companies across the
broader food value chain. This is where the global
impact of China’s increasing food needs will be felt
most acutely. Already, numerous countries have
erected barriers to foreign ownership of farmland as a
response to land purchase by countries such as China.
In some cases this already extends to the acquisition
of food companies. However, these acquisition trends,
driven by domestic policy imperatives, are likely
to continue.
PwC  1
China’s agricultural challenges
China and agriculture: Roads to
be travelled
China’s size, scale and its consequent impact on any
business sector globally have become almost a cliché
to the many observers, analysts and watchers of the
world’s second largest economy. From the export of
textiles, electronics and toys to the import of iron ore
and copper, attention has switched in recent years
towards other sectors – most notably agriculture. It
has become increasingly apparent that a more
affluent and more urbanised China is experiencing a
dramatic increase in the consumption of food –
specifically meat – and this too will have a global
impact. How we came to this point is not a simple,
straightforward story of growing affluence. To
understand the nuance, we need to look in detail at
how Chinese food consumption has changed over
recent decades.
Roads to be travelled
While most analysis approach this issue from a
national level, a complete picture only emerges by
considering three factors: – 1) the change in per
capita calories consumed and its composition, 2)
consumption patterns of specific commodity groups
per capita, and 3) the overall demand and supply of
commodities at national level. Taking all three
together provides clear insights into Chinese food
consumption patterns and offers indicators for
the future.
PwC  2
China’s agricultural challenges
Consumption
Consider the table below– it highlights daily calorie consumption per person across a range of countries over
the past five decades. In 1971, the average Chinese consumed just about 60% of that of the average American or
Briton. Chinese consumption levels were also lower than that of its neighbours Malaysia, Thailand and
Vietnam. Part of the reason for this was that China had suffered greatly under the Great Leap Forward and the
horrors of the Cultural Revolution had reached a peak. However, following the liberalisation process in 1978,
China caught up rapidly with the rest of the world. By 2011, the average Chinese was consuming more calories
per day than the average Malaysian, Thai, Indonesian, Filipino, Vietnamese and even Japanese. More
importantly, calorie consumption was fast approaching the levels of South Korea, the UK and the US.
Consumption (kcal/capita/day)
Total calories
1971
1981
1991
2001
2011
China
1,863
2,178
2,444
2,819
3,074
Indonesia
1,964
2,315
2,356
2,424
2,713
Malaysia
2,527
2,747
2,650
2,822
2,855
South Korea
2,899
2,970
2,950
3,080
3,329
Thailand
2,194
2,198
2,245
2,578
2,757
Philippines
1,837
2,221
2,214
2,374
2,608
Vietnam
1,957
2,004
1,856
2,298
2,703
UK
3,245
3,091
3,210
3,402
3,414
US
3,052
3,218
3,522
3,709
3,639
Japan
2,729
2,750
2,934
2,890
2,719
Source: FAO
At first glance, it appears obvious that growth in Chinese per capita consumption has slowed down. An easy
conclusion, which could be drawn, is that since it is close to the levels of developed countries, future growth is
likely to be muted. However, considering total calories consumed alone distorts the picture. Consider the tables
below: daily per capita calories consumed from vegetal sources and animal sources separately. Vegetal products
are chiefly cereals, starches, vegetables, oils and fruits, while animal products are chiefly meat, eggs, milk
and fish.
This is where the previous conclusion becomes less obvious. In vegetal products, Chinese per capita calorie
consumption has risen by about a third over the past five decades, while that from animal products has
increased some four and a half times. This is in line with what is often referred to as Bennett’s Law. Merrill K.
Bennett noted in his 1941 publication ‘Wheat in National Diets’, that calories derived from staple foods
decrease as income increases and, as a consequence, calories from other foods such as meat increase.
Roads to be travelled
PwC  3
China’s agricultural challenges
Consumption (kcal/capita/day)
Vegetal calories
1971
1981
1991
2001
2011
China
1,738
2,002
2,128
2,296
2,383
Indonesia
1,904
2,238
2,242
2,299
2,536
Malaysia
2,244
2,336
2,134
2,297
2,336
South Korea
1,944
2,061
2,136
1,953
1,974
Thailand
2,007
1,995
1,978
2,284
2,410
Philippines
1,581
1,980
1,925
2,020
2,218
Vietnam
1,829
1,880
1,690
2,004
2,129
UK
2,014
1,965
2,175
2,395
2,425
US
2,056
2,258
2,544
2,697
2,644
Japan
2,284
2,211
2,316
2,287
2,166
Animal calories
1971
1981
1991
2001
2011
China
125
177
317
523
691
Indonesia
60
77
115
126
177
Malaysia
284
411
516
525
519
South Korea
153
235
233
143
128
Thailand
188
203
267
294
347
Philippines
256
241
290
354
390
Vietnam
128
124
166
294
574
UK
1,231
1,126
1,035
1,007
989
US
996
961
978
1,012
995
Japan
445
539
618
603
553
Source: FAO
Consumption (kcal/capita/day)
Source: FAO
Compared to the US and the UK, Chinese vegetal-derived calories in 2011 are just marginally behind, while
animal-derived calories are still 30% lower. This implies that in the future, growth in vegetal consumption is
likely to be muted, but growth in animal protein will likely remain strong. In other words, the overall Chinese
food consumption picture will remain a globally prominent theme in the years ahead – at least with respect to
animal products.
Breaking down the consumption statistics further, the chart below shows the change in Chinese per capita
calorie contribution from different commodities over the past five decades. The most obvious observations are
the decline in calorie contribution from cereals – from approximately two-thirds in 1971 to less than half in
2011, and the increase in calorie contribution from animal products from 7% to 22% over the same period.
Since consumption of animal products implies the indirect consumption of cereals, the net change in cereal
demand is not clear from this.
Roads to be travelled
PwC  4
China’s agricultural challenges
China calorie consumption distribution
100%
90%
6.68%
0.4%
2.5%
2.5%
17.1%
80%
7.63%
11.73%
0.4%
1.9%
3.1%
11.8%
0.7%
2.7%
5.4%
6.2%
70%
60%
19.19%
22.86%
1.7%
4.5%
2.7%
5.6%
6.8%
6.2%
7.1%
4.9%
50%
40%
67.5%
62.6%
64.7%
30%
55.0%
47.7%
20%
10%
0%
1969
Cereals
1979
Starchy roots
1989
Vegetable oils
1999
Vegetables
Fruits
2009
Animal products
Source: FAO
To answer that question we need to look at consumption in kilograms. In 2003, the average Chinese consumed
around 46kg of meat pa, of which about 71% was pork. By 2013, FAPRI estimated that this had increased to
approximately 57kg, a 23% increase in a decade. At the same time, the average American’s meat consumption
was estimated to be almost double that of the Chinese. However, it could be justifiably argued that the
American number reflects excessive levels of consumption and that China is unlikely to ever reach those peaks.
A better benchmark for China would be a developed Chinese society such as Taiwan. Note that Singapore or
Hong Kong would not be appropriate for this purpose since they have too many ‘outliers’ and render any
meaningful comparisons redundant.
Meat consumption (kg/person/year)
Country
China
European Union
Hong Kong
Indonesia
Japan
Philippines
Russia
South Korea
Taiwan
Thailand
US
Vietnam
2003
46
76
104
8
43
25
45
51
74
25
115
20
2013
57
77
145
9
47
27
59
63
74
27
107
29
2015
60
78
147
9
48
28
61
65
76
28
106
29
2020
67
79
151
10
49
30
64
70
82
30
107
31
2025
73
80
156
11
51
31
67
76
87
32
109
32
Source: FAPRI
Note: China includes the mainland only
Roads to be travelled
PwC  5
China’s agricultural challenges
The average Taiwanese consumed an estimated 74kg
of meat in 2013 – 30% more than the average
Chinese. If China’s per capita meat consumption
equalled Taiwanese levels immediately, China would
require an additional 94mnt of grains – almost the
entire expected corn output of Brazil and Argentina in
2014. This shows the impact that meat demand has
on cereals indirectly. Fortunately, perhaps, FAPRI
expects China and Taiwan to equalise only after 2025.
urban consumers. Given the different socio-economic
profiles of the two, their consumption patterns are
vastly different. Furthermore, given China’s
increasing levels of urbanisation, the average citizen is
becoming more urbanised. Thus to establish the
outlook for the country as a whole, we need to
examine both urban and rural consumption
separately and combine that while taking into account
increasing urbanisation rates.
The above analysis is at the individual level. To get a
national view, we simply have to aggregate the
numbers across the population. However, to
determine future trends, we need to take into account
another variable – namely, the split between rural and
The following charts highlight per capita consumption
of grains and meat for rural and urban dwellers. The
premise that grain consumption has declined while
meat consumption has risen is true for both urban
and rural residents.
China per capita grain consumption
300
262
256
250
kg/person/year
250
209
206
199
199
200
150
189
181
171
164
131
97
100
82
77
76
78
79
81
82
81
79
2000
2005
2006
2007
2008 *
2009
2010
2011
2012
50
0
1990
1995
Urban
Rural
Source: National Bureau of Statistics of China (NBSC)
Note: The x-axis is not to scale
Note: 2008 data is not available; for charting purposes, we have used an average of 2007 and 2009
China per capita meat consumption
300
262
256
250
250
kg/person/year
209
206
199
199
200
150
189
181
171
164
131
97
100
82
77
76
78
79
81
82
81
79
2000
2005
2006
2007
2008 *
2009
2010
2011
2012
50
0
1990
1995
Urban
Rural
Source: NBSC
Note: The x-axis is not to scale
Roads to be travelled
PwC  6
China’s agricultural challenges
Given that meat ultimately requires grains in the form of feed, this means that direct grain consumption has
declined much more dramatically. However, in the future, the balance of increasing meat consumption and
decreasing direct grain consumptions could be positive or negative.
Before we try to estimate that, a caveat is in order. The statistics noted above are sourced from National Bureau
of Statistics of China (NBSC) and the per capita meat consumption numbers are lower compared to those from
FAPRI or FAO. This discrepancy is usually attributed to two factors – these are estimates from household
surveys, which do not effectively measure consumption that occurs outside homes, which is especially relevant
for urban residents; and, consumption by migrant workers is not accounted for accurately.
It takes approximately 7kg of feed grain to produce 1kg of beef, 4kg for 1kg of pork and 2kg of grains for 1kg of
poultry. We use these conversion factors to estimate total grain consumption. As the below table demonstrates,
for both urban and rural dwellers, the per capita increase in indirect grain consumption through meat was less
than that of the per capita decrease in direct grain consumption over 1990-2012.
Changing consumption patterns in China (kg/pa)
1990
2012
Net
change
Grain to
meat
conversion
ratio
Net
increase
in grain
use
Grain
130.7
78.8
(52.0)
Pork
18.5
21.2
2.8
4.0
11.1
Beef and mutton
3.3
3.7
0.5
7.0
3.2
Poultry
3.4
10.8
7.3
2.0
14.7
Urban per capita consumption of
(52.0)
Net change in urban per capita demand for grain
(23.1)
Rural per capita consumption of
Grain
262.1
164.3
(97.8)
Pork
10.5
14.4
3.9
4.0
15.4
Beef and mutton
0.8
2.0
1.2
7.0
8.1
Poultry
1.3
4.5
3.2
2.0
6.5
Net change in rural per capita demand for grain
(97.8)
(67.8)
Source: NBSC, PwC
Roads to be travelled
PwC  7
China’s agricultural challenges
While on a per capita level there is a decline in total
grain consumption, on an aggregate level, Chinese
grain consumption (rice, wheat, corn and soybeans)
has increased – from about 316mnt in 1990 to
545mnt in 2012. This is mainly attributable to an
increasing population and urbanisation. We would
expect total grain consumption in China to continue
increasing for four reasons.
 First, China’s population growth may be
slowing, but it is still growing.

Second, the decline in urban per capita direct
grain consumption is showing signs of levelling
off. It declined to a low of 75.9kg in 2006, and
then rose in later years to reach 81.5kg in 2010.
It again declined over the following two years to
78.8kg in 2012. Combined with a likely increase
in indirect urban grain consumption, this
means that total per capita urban grain
consumption will most likely rise. While rural
per capita grain consumption is likely to
continue decreasing, its effect in the aggregate
would be muted as more people migrate to the
cities.
Roads to be travelled

Third, as China’s meat production industrialises,
feed grain demand will increase – the average pig
raised in a Chinese factory farm consumes 350kg
to reach slaughter weight, while that raised on a
family farm consumes only 150kg (i.e., the rest
comes from household waste and so on).

Finally, we have restricted our analysis to the use
of grains for food. In other words, we have
omitted the impact of industrial uses of grain such
as ethanol or biodiesel production, which may
possibly increase in the future
PwC  8
China’s agricultural challenges
Supply
Self-sufficiency in grains has long been a hallmark of
Chinese government policy. Since 1996, the explicit
aim was to produce 95% of its grains domestically. Or,
as Chinese officials put it somewhat less prosaically,
the Chinese must ‘hold the rice bowl firmly in our
hands’. However, its meaning has evolved over the
years. While it was initially understood to include rice,
wheat and corn, policy makers now seemingly count
only rice and wheat, that is, the two grains used
directly for human consumption. And soon, it could
end up as an ‘empty bowl’ – as self-sufficiency
becomes an increasingly unrealistic ideal.
The recent demand-supply history of soybeans, a key
oilseed, should be seen as a leading indicator.
Soybean meal is used as the chief protein source in
industrial feed for poultry and pork. As the Chinese
consume more meat, and as the meat producers
industrialise, demand for soybeans has increased
.
dramatically. China has barely been self-sufficient in
soybeans since the liberalisation process began in
1978. Domestic output peaked in 2004/05 at 17.4mnt
but has declined erratically in the subsequent decade.
In 2014/15 domestic production is expected to reach a
new low of under 12mnt. Yields held up but at the
expense of the harvested area, which declined as
farmers switched to corn. Meanwhile, annual
consumption has more than doubled from
approximately 40mnt to almost 85mnt over the past
decade. Consequently, imports have tripled from
almost 26mnt to an estimated 74mnt over the same
period. If China replaced this amount of imports with
domestic production, the country would require
another 42mn ha of land – nearly six times the
current soybeans area of 6.7mn ha. That alone
explains the exclusion of soybeans from the
government’s self-sufficiency calculations
Soybean statistics
Soybean
2004/
05
2005/
06
2006/
07
2007/
08
2008/
09
2009/
10
2010/
11
2011/
12
2012/
13
2013/
14
Area harvested
(mn ha)
9.6
9.6
9.3
Yield (tonnes/ha)
1.8
1.7
Production (mnt)
17.4
Imports (mnt)
Exports (mnt)
2014/
15
8.8
9.1
9.2
8.5
7.9
7.2
6.9
6.7
1.6
1.5
1.7
1.6
1.8
1.8
1.8
1.8
1.8
16.4
15.1
12.7
15.5
15.0
15.1
14.5
13.1
12.2
11.8
25.8
28.3
28.7
37.8
41.1
50.3
52.3
59.2
59.9
69.0
74.0
0.4
0.4
0.4
0.5
0.4
0.2
0.2
0.3
0.3
0.2
0.3
Domestic
consumption (mnt)
40.2
44.4
46.1
49.4
51.3
59.4
65.9
72.1
76.2
80.1
84.9
Ending stocks (mnt)
4.7
4.6
1.8
2.5
7.5
13.2
14.5
15.9
12.4
13.2
13.8
Source: USDA
Roads to be travelled
PwC  9
China’s agricultural challenges
Corn appears to be following a similar trajectory. In 2012, China’s Minister of Agriculture Han Changfu stated
that the country must prevent corn from becoming the ‘second soybean’. This moniker alone indicates the
strength of desire for food security in China. However, increasingly the country appears to be fighting a losing
battle as demonstrated by the table below.
Corn statistics
Corn
2004/
05
2005/
06
2006/
07
2007/
08
2008/
09
2009/
10
2010/
11
2011/
12
2012/
13
Area harvested
(mn ha)
2013/
14
2014/
15
25.4
26.4
28.5
29.5
29.9
31.2
32.5
33.5
35.0
36.3
36.8
Yield (tonnes/ha)
5.1
5.3
5.3
5.2
5.6
5.3
5.5
5.7
5.9
6.0
5.9
Production (mnt)
130.3
139.4
151.6
152.3
165.9
164.0
177.2
192.8
205.6
218.5
217.0
Imports (mnt)
0.0
0.1
0.0
0.0
0.0
1.3
1.0
5.2
2.7
3.4
3.0
Exports (mnt)
7.6
3.7
5.3
0.5
0.2
0.2
0.1
0.1
0.1
0.0
0.1
Domestic
consumption (mnt)
131.0
137.0
145.0
150.0
153.0
165.0
180.0
188.0
200.0
212.0
220.0
Ending Stocks (mnt)
36.6
35.3
36.6
38.4
51.2
51.3
49.4
59.3
67.6
77.4
77.3
Source: USDA
Unlike the soybean sector, corn output has kept pace with consumption. The harvested area has increased some
45% while yields have increased some 15% over the last decade. However, as is the case with soybeans, demand
growth is likely to remain strong for many years to come. And the spectacular increases in planted area and
yields seen in the past decade are highly unlikely to be repeated in the medium term. From a position of selfsufficiency in recent years imports are likely to reach 3mnt in 2014/15. Compare this to a net export position of
almost 8mnt in 2004/05, and it appears that corn is well on its way to becoming the ‘second soybean’. One
moderating factor is that, in recent years, some feed demand has shifted to wheat – as we discuss below.
However, this simply means that China will import wheat instead of corn.
Consider wheat, which along with rice, is used primarily for human consumption –and therefore has a strategic
position, which is not shared by corn or soybeans. Until 2010, consumption increased only marginally and
China managed to fulfil additional demand through a gradual increase in planted area and yields. However, in
2011/12 demand jumped about 11% and has remained at these levels. At the same time, production has
increased at a much slower pace while imports have plugged the shortfall. Over the last five years, the planted
area has remained constant while yields have increased marginally. This suggests that future increases, if any,
are likely to be minimal.
Wheat statistics
Wheat
2004/
05
2005/
06
2006/
07
2007/
08
2008/
09
2009/
10
2010/
11
2011/
12
2012/
13
2013/
14
2014/
15
21.6
22.8
23.6
23.7
23.6
24.3
24.3
24.3
24.3
24.1
24.1
Yield (tonnes/ha)
4.3
4.3
4.6
4.6
4.8
4.7
4.7
4.8
5.0
5.1
5.2
Production (mnt)
92.0
97.4
108.5
109.3
112.5
115.1
115.2
117.4
121.0
121.9
126.0
Imports (mnt)
6.7
1.1
0.4
0.0
0.5
1.4
0.9
2.9
3.0
6.8
2.0
Exports (mnt)
1.2
1.4
2.8
2.8
0.7
0.9
0.9
1.0
1.0
0.9
1.0
102.0
101.5
102.0
106.0
105.5
107.0
110.5
122.5
125.0
121.5
124.0
38.8
34.5
38.6
39.1
45.8
54.4
59.1
55.9
54.0
60.3
63.3
Area harvested
(mn ha)
Domestic
consumption (mnt)
Ending Stocks (mnt)
Source: USDA
Roads to be travelled
PwC  10
China’s agricultural challenges
A key feature highlighted the table above is the sudden jump in demand for wheat in recent years. The reason
for this rise is the growing use of wheat as feed. Total demand is split into food, seed, and industrial demand
(FSI) and feed demand. FSI demand has barely moved in recent years and only rose marginally over the last
three years. However, feed demand has risen steadily. In 2011/2012, it nearly doubled and has stayed at that
level since. While corn remains the main carbohydrate component of industrial feed other cereals such as wheat
are also used depending on relative prices.
Wheat consumption split
Wheat
2004/
05
2005/
06
2006/
07
2007/
08
2008/
09
2009/
10
2010/
11
2011/
12
2012/
13
2013/
14
2014/
15
Feed consumption (mnt)
4.0
3.5
4.0
8.0
8.0
10.0
13.0
24.0
25.0
21.0
23.0
Food, seed and industrial
consumption (mnt)
98.0
98.0
98.0
98.0
97.5
97.0
97.5
98.5
100.0
100.5
101.0
102.0
101.5
102.0
106.0
105.5
107.0
110.5
122.5
125.0
121.5
124.0
Total (mnt)
Source: USDA
While we can safely predict a rise in feed use, the split between corn and wheat is difficult to estimate. However,
regardless of the split, it is reasonably certain that the bulk of this excess consumption will be satisfied by
imports. The reason for our pessimistic view on Chinese production is explained later in this report when we
look at supply constraints.
Finally, the table below highlights rice statistics for the last decade. Production rose gradually as consumption
declined initially. However, it is now increasing. For the most part, China has managed to avoid imports.
However, in the last three years, harvested area and yields have stagnated while consumption has maintained a
steady rate of growth. This has led to a rise in imports although it remains a fraction of total consumption.
Growth in rice consumption is likely to remain muted as slowing population growth and urbanisation keep a lid
on growth. That said, since production is also unlikely to increase significantly in the years ahead, some imports
may continue.
Rice statistics
Rice
2004/
05
2005/
06
2006/
07
2007/
08
2008/
09
2009/
10
2010/
11
2011/
12
2012/
13
2013/
14
2014/
15
28.4
28.8
28.9
28.9
29.2
29.6
29.9
30.1
30.1
30.3
30.6
6.3
6.3
6.3
6.4
6.6
6.6
6.6
6.7
6.8
6.7
6.7
125.4
126.4
127.2
130.2
134.3
136.6
137.0
140.7
143.0
142.5
144.0
Imports (mnt)
0.6
0.7
0.5
0.4
0.2
0.4
0.5
1.8
3.1
3.9
3.7
Exports (mnt)
0.7
1.2
1.3
1.4
0.7
0.7
0.5
0.4
0.3
0.3
0.4
130.3
128.0
127.2
127.5
133.0
134.3
135.0
139.6
144.0
146.3
148.0
38.9
36.8
35.9
37.8
38.5
40.5
42.6
45.0
46.8
46.7
46.0
Area harvested
(mn ha)
Paddy yield
(tonnes/ha)
Production (mnt)
Domestic
consumption (mnt)
Ending Stocks (mnt)
Source: USDA
Roads to be travelled
PwC  11
China’s agricultural challenges
Early in 2014, the State Council called for grain
production to stabilise at 550mnt, lower than the
602mnt produced in 2013, signalling a shift from selfsufficiency. It seeks to set a priority on labourintensive and high-value crops such as fruits and
vegetables at the expense of land-intensive, low-value
grains. Furthermore, the guidelines demonstrate an
increasing emphasis on for quality and food safety.
Some of this newfound stress on quality and safety
stems from the many negative cases reported in
recent years in China. These range from cadmium
contamination of rice, adulterated fox meat sold as
mutton and dead pigs floating down the Huangpu
River through Shanghai.
Part of the reason for this strategic shift, in our view,
is merely the government facing up to reality. To meet
rapidly rising demand, supply can increase primarily
through an increase in planted area and enhanced
yields. In China’s case, while yields can increase – an
area we discuss later – an increase in planted area is
highly unlikely. In short, China has been struggling to
maintain its ‘red line’ of 120mn ha of farmland due to
land degradation, water scarcity and pollution.
Thus, the only option is to set priorities. That is,
accept that self-sufficiency is not possible for all the
major grains and oilseeds, which is what the country
appears to be doing in practice. Initially, the
government encouraged corn planting over soybeans
over the last decade. Now, rice and wheat remain high
priority grains given that they are used for human
consumption, while corn and soybeans are considered
lower priority.
Roads to be travelled
Even with meat, there are two options available:
import meat directly or import feed grains and
produce meat domestically. The implications of these
alternatives are quite different. If China imports corn
and soybeans from the US or Brazil for its livestock, it
will have to address the livestock-related negative
effects on the environment and health. On the plus
side, it will have an industry that provides high levels
of employment. If China were to import meat from
the US or Brazil, it would transfer environmental and
health problems to the US or Brazil but would be
susceptible to supply and price volatility. The other
major benefit of this approach would be to allow
scarce land and water resources to be shifted from
animal husbandry to priority crops such as rice
and wheat.
Evidence suggests that China is doing a bit of both. As
we saw earlier, in the past decade, corn imports have
gone from being non-existent to about 3mnt and
soybean imports have tripled to 74mnt.
Simultaneously, meat imports have grown five-fold to
1.5mnt. This trend is likely to continue with both feed
grains and meat imports growing. The purchase of the
USA’s largest pork producer Smithfield, by the
Chinese company Shuanghui International (now
called the WH Group), is a demonstration of how
Chinese meat imports are likely to rise.
PwC  12
China’s agricultural challenges
Supply constraints
China feeds 20% of the world’s population with just
8% of the earth’s arable land, which works out at
about 0.09ha per person. The ‘red line’ of 120mn ha
of farmland as a Chinese policy goal is an
acknowledgement of this pressure. The first policy
document of 2014, referred to as ‘No.1 Document’,
emphasised that the ‘red line’ should be
strictly protected.
The reason for this obsession is simple: China has lost
farmland consistently over the years due to
urbanisation, construction, land degradation and so
on. According to China’s first national land survey in
1996, arable land amounted to 130mn ha. This was
estimated to have fallen to about 121mn ha by 2008.
However, after a second national land survey which
concluded in 2009, but whose result were only
published last year, arable land was now estimated at
about 135mn ha. However, after deducting land set
aside for restoration or polluted, available arable area
was estimated to be just above 120mn ha.
The ‘No.1 Document’ also recognises the importance
of developing sustainable agriculture and the need to
restore polluted and degraded land. Land is degraded
usually due to over-cultivation, over-grazing and
deforestation. In 2008, a three-year study conducted
jointly by the Ministry of Water Resources, the
Chinese Academy of Sciences and the Chinese
Academy of Engineering, found that over 350mn ha
of land was affected by erosion, of which 160mn ha
was due to water and 200mn ha was due to wind.
Combined, about 4.5bn tonnes of soil were eroded
each year, at a cost of RMB200bn since 2000.
Land can also be degraded by pollution and this has
become a major concern in recent years. Earlier this
year, China’s vice-minister of land and resources,
Wang Shiyuan, noted that a soil survey had identified
some 3.33mn ha of contaminated land. Not that these
are new problems. In 2006, Zhou Shengxian, the
director of the State Environmental Protection
Administration (SEPA) said that China faced ‘serious’
soil pollution that would affect both people’s health
and the environment. He further noted that
approximately 12mnt of grain are polluted each year
by heavy metals from the soil, with economic losses of
over US$2.5bn.
Roads to be travelled
To tackle this issue, SEPA along with the Ministry of
Land and Resources jointly launched a soil pollution
survey with a budget of US$125m, with the aim of
assessing land pollution due to heavy metals,
pesticides, and organic pollutants, and use the results
to rehabilitate affected land. While this soil survey
was completed in 2010, its results were never
announced. The Environment Ministry rejected
requests for the survey data to be published saying
that they were a ‘state secret’. Fears that the survey
results might prove disquieting may be well founded.
According to Bai Chengshou, Deputy Head of the
Nature and Ecology Conservation Department at the
Ministry of Environmental Protection, the results of
the survey would be published after further sampling
to improve accuracy. He also said that the
government was in the process of coming up with an
action plan to control soil pollution.
Recently, the government released statistics from a
soil survey – it is not clear if it is the one previously
noted – which indicate that nearly a fifth of China’s
farmland is polluted mostly by human, industrial and
agricultural activities. Again, there were assurances of
the government taking action to stop and reverse
this pollution.
The key point here is that the Chinese government is
struggling to maintain its existing cultivated land
bank. Under these circumstances, increasing the
supply of available land is highly unlikely. So, any
increase in output will have to come via
enhanced yields.
As we pointed out in the previous section, yields of
major commodities have stagnated or grown slowly in
recent years. The chart below shows the yield growth
over the past decade for rice, wheat, corn and
soybeans. The yield growth for both wheat and corn
are showing a declining trend, while that for rice is
moribund and just barely positive. Soybean yield
growth has been erratic in recent years and on a net
basis has been effectively stagnant over the
past decade.
PwC  13
China’s agricultural challenges
Chinese annual yield growth
8.0%
6.0%
4.0%
2.0%
0.0%
(2.0)%
(4.0)%
(6.0)%
(8.0)%
2004
2005
2006
2007
Corn
2008
Paddy rice
2009
2010
Wheat
2011
2012
2013
Soybean
Source: USDA
Note: Yields are calculated on a 3-year moving average basis
The most likely conclusion based on the above historical performance is that future yield gains will be difficult
to achieve. However, before we draw our final conclusion there is another way to consider long-term yield
potential; look at how Chinese yields compare with those of other major producers to see the potential upside.
The charts below show the 2014/15 yields for the top-10 producers of each commodity.
Paddy rice yields for major producers (2014/15)
8.0
7.0
6.7
6.7
5.8
6.0
tonnes/hectare
5.0
5.0
4.8
4.4
4.0
4.0
3.5
2.9
3.0
2.7
2.0
1.0
0.0
China
Japan
Vietnam
Brazil
Indonesia Bangladesh Philippines
India
Thailand
Burma
Source: USDA
Roads to be travelled
PwC  14
China’s agricultural challenges
Wheat yields for major producers (2014/15)
7.0
5.8
6.0
5.2
tonnes/hectare
5.0
3.9
4.0
3.1
3.0
3.0
3.0
2.8
2.5
2.0
2.0
1.8
1.0
0.0
European
Union
China
Ukraine
India
Canada
United
States
Pakistan
Russia
Turkey
Australia
Source: USDA
Corn yields for major producers (2014/15)
12.0
10.9
10.0
tonnes/hectare
8.0
7.4
7.1
5.9
6.0
5.4
5.0
4.6
4.2
4.0
3.3
2.4
2.0
0.0
United
States
European
Union
Argentina
China
Ukraine
Brazil
Russia
South
Africa
Mexico
India
Source: USDA
Roads to be travelled
PwC  15
China’s agricultural challenges
Soybean yields for major producers (2014/15)
3.5
3.2
3.0
3.0
2.8
2.7
2.7
2.6
tonnes/hectare
2.5
2.0
2.0
1.8
1.4
1.5
1.0
1.0
0.5
0.0
United
States
Brazil
Argentina
Uruguay
Canada
Paraguay
Ukraine
China
Russia
India
Source: USDA
In rice, China already has the highest yield along with Japan. In wheat, it is only behind the EU. In corn, it is
considerably behind the US and the EU, but is still in fourth place ahead of Brazil. In soybeans, it is near the
bottom of the pack. However, it is worth emphasising that China is a relatively minor player in soybean
production. What it does demonstrate is that, when it comes to the three main grains, China does not lag
significantly behind the other major producers. More importantly, where Chinese yields lag, it cannot be
assumed that the entire gap can be bridged. Part of the gap could be attributable to differences in agroecological environments e.g. natural factors such as soil or climate, which cannot be overcome. The rest could
be due to fertilisers, irrigation, crop management farming practices and so on – which could be bridged, at least
in theory. However, in practice, the narrowing of this gap will be limited by the extent to which it is
economically feasible.
Over the past two decades, China has made strenuous efforts to increase yields. Specifically it has doubled the
use of fertilisers and increased irrigated areas by approximately one-third.
China irrigated area and fertiliser consumption
60
49
49
49
49
50
51
52
53
54
54
million hectares
50
40
30
29
32
33
36
38
40
41
41
41
43
54
43
54
44
54
46
55
48
56
49
57
51
62
58
60
63
59
57
58
54
56
52
70
60
50
40
30
20
20
10
10
-
million tonnes
70
0
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Fertiliser consumption (RHS)
Irrigated area
Source: NBSC
Roads to be travelled
PwC  16
China’s agricultural challenges
While the rate of growth in fertilisers has slowed in
the past decade, irrigation has increased. However,
the growth in yields that China can expect from these
two measures in the future is limited for reasons we
outline below.
While the use of fertilisers has increased yields, it has
also contributed to land, water and air pollution. Most
of China’s chemical inputs are applied inefficiently.
The World Bank estimated that, in 2012, China
applied some 650kg of fertiliser per hectare of arable
land – the highest by far among major agricultural
nations, even developed ones. For comparison, the
corresponding numbers were 163kg for India, 156kg
for the EU, 181kg for Brazil, 131kg for the US, 75kg for
Canada, 45kg for Australia and 39kg for Argentina.
So, even greater use of fertiliser is likely to have a
lesser effect on yields, and might even have a negative
indirect effect due to land and water pollution.
Zhuang Guotai, the Ministry of Environmental
Protection’s Director of Nature and Ecology
Conservation, stated in a press conference in April
2013, that only about 35% of fertiliser used in a
typical Chinese farm contributed to crop growth. The
rest evaporates, washes off into streams, or is
consumed by people or animals. So, it not only
contains an economic cost but an environmental one
too. The Chinese Academy of Agricultural Sciences
(CAAS) predicted last year that all central and South
Eastern provinces bar Jiangxi and Shanxi were at high
risk of suffering groundwater nitrate pollution by
2015.
While irrigation can lead to higher yields, there is a
different constraint there – water; China does not
have enough of it and what it has is increasingly
polluted and not where it is required the most. Similar
to the case with land, China supports 20% of the
world’s population with just over 8% of the world’s
renewable water resources. On a per capita basis this
is over 2,000 cubic metres of renewable water pa,
while the global average is over three times that
number. However, even this hides a stark regional
disparity – the Northern regions account for only
about 18% of the total water resources. At the same
time, they account for 28% of the population and
about 44% of the cultivated land.
China northern and southern regions disparity
100%
90%
80%
56%
70%
60%
72%
82%
50%
40%
30%
44%
20%
10%
28%
18%
0%
Population
Cultivated area
North
South
Water resources
Source: NBSC
Roads to be travelled
PwC  17
China’s agricultural challenges
The chart below shows the renewable water resources available per person across provinces. The range extends
from 143 cubic metres in Shanghai to 137,378 cubic metres in Tibet. Tibet is obviously an outlier, since it is the
source of many large rivers and has a low population. However, Shanghai is not. The chart below shows the
provinces with the lowest water resources, most of which are in the North. To put this into perspective, the
global comparables for similar renewable water resource levels are Jordan and Israel.
Renewable water resources
250.0
238
231
193
200.0
cubic metres/person
168
145
143
150.0
100.0
50.0
0.0
Shanghai
Ningxia
Beijing
Tianjin
Jordan
Israel
Source: NBSC
Note: Northern regions are in yellow
The previous discussion focused on the supply of water while the following focuses on water usage. The key
metric here is the percentage of supply that is used annually. Consider Beijing: the average inhabitant used
about 176 cubic metres in 2012, about 91% of the supply. The table below highlights usage per capita and usage
as a percentage of supply for those few selected provinces where usage already exceeds availability or close to it.
Water usage in selected provinces
642%
1,200
600%
1,000
cubic metres
700%
500%
800
342%
400%
600
300%
400
200
148%
83%
200%
70%
91%
69%
81%
90%
167
176
204
230
254
269
491
698
1,078
Tianjin
Beijing
Shanxi
Shandong
Henan
Hebei
Shanghai
Jiangsu
Ningxia
100%
0
0%
Water use per capita
Usage / supply (RHS)
Source: NBSC
Note: Northern regions are in yellow
Roads to be travelled
PwC  18
China’s agricultural challenges
While water availability affects nearly every aspect of the economy, the impact is probably greatest in
agriculture, which accounts for about a third of China’s total water usage. Most crops require about 5,0008,000 tonnes of water per hectare in a single growing season. Thus, any scarcity of water will lead to poor
yields. To see the scope of this problem for China, consider the following chart: it shows the water
usage/availability percentage for the top five provinces that were responsible for 35% of China’s agricultural
output in 2012. This includes farming, forestry, animal husbandry and fishery. With the exception of Sichuan,
the rest of the provinces are already at critical water usage levels. Any further deterioration in water availability
will affect agricultural output. At the same time, it also demonstrates that there is very little scope for increasing
irrigation in these provinces.
Provincial contribution to total output and water usage
148%
10%
160%
9%
140%
8%
120%
7%
6%
90%
100%
81%
83%
5%
80%
4%
60%
3%
40%
2%
1%
9%
7%
6%
9%
6%
6%
Shandong
Henan
Jiangsu
Sichuan
Hebei
20%
0%
0%
Agricultural output contribution
Water usage / supply (RHS)
Source: NBSC
The second aspect of the water supply problem is
pollution. In 2013, a Ministry of Land and Resources
survey found over half the groundwater on the North
China Plain to be unsuitable for industrial use and
over 70% unsuitable for human contact. According to
the Ministry of Environmental Protection’s (MEP)
2012 State of Environment Report, about 30% of the
water in the ten biggest rivers was ‘polluted’ or ‘highly
polluted’. It also found that more than half of the
groundwater in 198 cities was ‘bad’ or ‘very bad’. The
chief problem was the high level of chemical pollution
mostly from industry and animal husbandry.
To overcome the problems of water scarcity China has
embarked on the ambitious South-North Water
Diversion Project, a modern version of Imperial
China’s Grand Canal, which will consume over
US$80bn of investment in the next few decades in an
attempt to divert water from the Yangtze River to the
parched regions of the North. The first leg – the
eastern route – began supplying water to Dezhou in
Shandong Province late last year. However, the water
is polluted and for now is only suitable only for
industrial purposes.
Roads to be travelled
Given the problems of water quantity and quality, it is
almost certain that China is going to struggle to
supply clean water for its agricultural needs. So, any
yield enhancements from greater irrigation are
unlikely to materialise.
We have analysed the major factors that can increase
agricultural output – namely, land and water. Given
the constraints present, China will find it increasingly
difficult to increase output via these factors. Output
growth would have to come from elsewhere, for
example, land consolidation, mechanisation,
improved seeds and better crop management
practices.
PwC  19
China’s agricultural challenges
The Chinese government has invested heavily in
genetically modified crops. However, there are
concerns among the Chinese over the safety of GM
crops safety – an understandable one given assorted
food safety scandals in recent years. To allay fears, the
government launched a media campaign in
September 2014 in support of GM crops. It hopes to
educate the public and create a favourable
atmosphere for the development of the GM industry.
In the same month, the government also released
President Xi Jinping’s unpublished speech from
December 2013, wherein he endorsed GM crops.
Paradoxically, despite an active campaign to promote
GM crops, the Chinese government has rejected
imports of US corn since November 2013 due to the
presence of Syngenta’s MIR162 genetically modified
corn, marketed as Viptera. China has yet to approve
the MIR162 variety for imports although Syngenta
applied in 2010. The same strain can be imported into
the EU – despite its virulently anti-GMO stand.
Therefore the actions of the Chinese government
might, at first glance, appear irrational. However
there is logic to their policy response. Recall our
earlier table on Chinese corn statistics, which
highlights how Chinese production has increased by
Roads to be travelled
some 70% over the past decade. Much of this was
achieved by the government using higher prices to
incentivise and promote domestic production. Seen
from this perspective, the Chinese are most likely
using the GM issue as a smoke screen to limit
imports. Another possible explanation is that the
Chinese are attempting to diversify their corn import
source. After all, in 2013, nearly all of China’s corn
imports originated in the US. Although imports will
likely continue to rise, equally likely, the government
will continue to limit them.
As a footnote, note that Syngenta is being sued by
Cargill and some US-based farmers for marketing its
Viptera seed before it obtained import approval from
China. This demonstrates the impact that Chinese
policies now have overseas. Although the country
currently imports a mere 3mnt of corn, you only need
to look a few years hence when this near rounding
error becomes material.
Obviously all of the above demonstrates that the
Chinese government recognises that the agriculture
sector needs to be transformed. The following section
looks at how the state supports agriculture.
PwC  20
China’s agricultural challenges
Government and the agriculture sector
China’s agricultural sector has witnessed major structural changes since the foundation of the People’s Republic
in 1949. In its formative years, the state took control of all land and established a monopoly on the purchase
and marketing of farm output. In 1958, the collective farms were merged into larger ‘people’s communes’ and
private food production was banned. For the next twenty years the commune system reduced incentives,
removed price signals and prevented the efficient allocation of resources.
Evolution of Chinese agriculture
Period
Political events
Impact on agriculture
1949 – 1952
Redistribution of land from landlords
to peasants.
Grain output increased to 164mnt up 48%
from 1949 Agricultural output reached
CNY46bn in 1952, nearly doubling from 1949
1953 – 1957
Collectivisation of land Co-operative farms
Agricultural value grew only 3.1%, while grain
output grew 3.5% – a dramatic reduction
from 14% and 13% in the 1949-52 period
1958 – 1960
The Great Leap Forward ‘People’s communes’
were established and private food production
banned
Between 1958 and 1960, agricultural output
fell by a fifth, and grain output by over a
quarter
1961 – 1965
The Re-adjustment Period The government
adopted the principle of ‘readjustment,
consolidation, supplementation and
improvement’.
Compared to 1960, agricultural output grew
82% and grain output by over a third
1966 – 1976
The Cultural Revolution
Annual growth in agricultural value and
grains output slowed down dramatically to
just over 3.5%
Source: NBSC, The Robinson Rojas Archive, Collectivisation and China’s agricultural crisis in 1959-1961, Chinese Economic Reforms and
Fertility Behaviour.
In 1978, Deng Xiaoping initiated rural reforms, which
led to the abolition of the commune system. Among
the policy changes introduced thereafter, perhaps the
most significant was the Household Responsibility
System (HRS). Under this, land was assigned to
households for 15 years (and later 30 years), and each
was given crop quotas to fulfil. The quotas were
relatively small but anything above that could be sold
for profit in the open market. This meant that farmers
were provided with incentives to increase output. In
the initial period of these reforms, between 1978 and
1984, grain output grew 5% annually. However, once
the easy wins were over, annual growth decelerated to
1.2% over the next decade. Rising prices and imports
necessitated another round of reforms such as the
‘Governor’s Grain Bag Responsibility System’, which
made provincial governors responsible for balancing
grain supply and demand and stabilising grain prices
in their provinces.
While the HRS was certainly a major improvement on
the commune system, it was far from perfect. The key
problem was that, given the large population and limited
land available, each household only received a small
amount to farm. This problem was accentuated by the
fact that, since land parcels had different soil
Roads to be travelled
characteristics, suitability for irrigation, location, and so
on, and since each household had to get parcels for all
grades, the land that they got was fragmented and
scattered. This limited the scope for economies of scale
through irrigation and mechanisation. Furthermore, as
this was a continuous process, an increasing population
implied further land fragmentation. Finally, since the
process emphasised household size and disregarded
capability, many households received large land parcels
but with limited labour forces, and vice versa – thus
hindering an efficient allocation of a scare resource. This
problem was exacerbated by urban migration, which
further reduced the rural labour force.
Some of these problems were addressed with reforms
that limited redistribution, extended tenure and
widened the scope for renting out land. This led to the
development of a land rental market, but the
agreements tended to be informal and short-term.
The Third Plenum of the 17th Party Congress in 2008
emphasised the need to encourage the land rental
market, and since then policy makers have
experimented with various pilot projects. Apart from
renting land-use rights, there have also been attempts
to mortgage assets to raise financing. The 2013 ‘No. 1
Document’ called for a transition to large-scale farms
PwC  21
China’s agricultural challenges
in China and encouraged farmers to rent out their
land to large farming entities, co-operatives and
agricultural enterprises. There is even a ‘large farm’
subsidy being tested in a few provinces, given to
farmers planting more than a certain provincespecific area of grain. All of this has had an effect –
the Ministry of Agriculture estimated that in 2013,
around 26% of China’s farmland had been rented, up
from approximately 9% in 2008.
More reforms are on the way. The Third Plenum of
the 18th CPC Central Committee, concluded last year,
aimed to provide famers with greater property rights,
increase farmers’ property income and allow rural
residents to benefit from modernisation. Specifically:
(i) endow farmers with mortgage and guarantee
power for contractual management rights, (ii)
propose to push forward ‘cautiously and steadily’
collateral, guarantee and transfer of farmers’
residential property rights, (iii) endow farmers with
rights for possession, income, pledge, guarantee,
inheritance and paid withdrawal of shares in
collective assets, and (iv) propose to support the
development of large-scale, professionalised and
modernised operations. A concrete example is that it
allows collectively-owned ‘rural construction land for
commercial use’ to be transferrable and rentable and
aims to build a unified market for both urban and
rural construction land. Other major reforms include
the reduction in scope of land expropriation by local
governments.
For sure, this is a statement of intent at this stage and
the extent of implementation remains to be seen.
Most reforms to date are at the pilot-test stage and
not close to rollout and execution at national level.
Moreover, some of these initiatives might be difficult
to implement because local governments, whose
revenues will be reduced, might oppose them.
According to World Bank data, on average, local
governments receive 40% of the tax revenues from the
central government, but are responsible for 80% of
total government spending. These deficits are usually
covered through the sale of collectively owned land
seized from farmers. Rural land reform will curtail
these activities and put more strain on local
governments’ fiscal positions. In short, progress in
land reform is an arduous, slow process.
Roads to be travelled
Land reform was important and led to higher output
but it did not increase rural incomes in sharp contrast
to what happened with urban incomes. Crucially it
also led to widespread income inequality across the
country. Thus, a decade back, Chinese policymakers
began seeking ways to extend direct benefits to
farmers. In 2004, China introduced the first national
direct subsidies to farmers and began phasing out
agricultural taxes. The direct subsidy was based on
the land area. However, the unintended consequence
of this action was that landowners could leave the
land fallow and still get subsidies, while farmers who
cultivated leased land would not. Since 2013, the
government has moved towards linking direct
subsidies to land planted or grain harvested.
In September 2014, the government released details
about the pilot ‘target price’ subsidy programme for
cotton and soybeans. This policy represents a new
approach to agricultural support that will reduce
government interference in prices and let the markets
have a greater role. The subsidy under this
programme is calculated as the difference between a
‘target price’ set by the government before planting
and the market price in each province.
In addition to recognising the need to increase
productivity, the government also introduced
subsidies for seeds, fertilisers and agricultural
machinery. Subsidies are available for high-quality
seeds, such as high-oil soybean, industrial-use corn
and high-protein wheat varieties. These are usually
paid directly to farmers but, in some areas, they are
paid to seed suppliers, who are then supposed to pass
it on to farmers. Fertiliser subsidies also work in a
similar way. Machinery subsidies are paid to
machinery dealers, who are expected to pass it on. In
the Twelfth Five-Year Plan, the government aimed to
increase total agricultural machinery power to 1bn
KW and the agricultural mechanisation rate to 60%
by 2015. However, the power target was achieved by
2012, and the mechanisation rate reached 59%
in 2013.
Other government support measures include a
minimum price scheme for rice and wheat, VAT
refunds or waivers and transport tax waivers. The
government has also sought to increase investment
through the extension of finance via the Rural Credit
Co-operatives that provide loans to farmers for input
purchases, machinery and other investments.
PwC  22
China’s agricultural challenges
All these government measures to increase
production aim to get around the problem of limited
land and water resources. Will these be sufficient to
prevent imports? In our view, no. While these policies
will most likely boost yields, it will not be anywhere
near sufficient to meet the strong growth in demand
in the years ahead.
Thus China has begun to turn its attention overseas; if
there are constraints on land and water at home, why
not buy land in Ukraine or Zambia and grow wheat
and corn for export to China? For sure, this does not
replicate ‘self-sufficiency’ as China would still be
vulnerable to external shocks such as export bans and
land expropriation. However, it does possess merit.
Firstly, it provides an avenue for China to diversify its
current account surpluses away from financial assets
such as US treasuries into real assets such as
farmland. Secondly, it fits in with the wider theme of
food production shifting to low-cost producers such as
Africa. Finally, it will also help to promote free trade
through interdependency.
In its 10th five-year plan in 2001, China initiated its
‘Go Out’ policy aimed at encouraging Chinese
investment abroad. Although China has been involved
in African agriculture since the 1960s, it was mostly in
a technical capacity, with some trade relations and
limited farming investments. But since the ‘Go Out’
policy, its involvement has shifted to include largescale farming, processing, equipment export and
agricultural infrastructure development. In 2009,
Chinese investment in African agriculture was
estimated at US$30bn. In the 2014 ‘No.1 Document’,
the government called for the ‘Go Out’ policy to be
accelerated and in an August 2014 press release, the
Ministry of Commerce announced that over 300
farming enterprises had invested across 46 countries.
However, most of these farming deals are at small
scale and mostly less than 10,000ha. There have been
media reports of large transactions but actual hard
evidence is hard to come by. For example, media
reports since 2007 have recorded ZTE Agribusiness’s
concession to cultivate palm on an area ranging from
100,000ha to the somewhat larger 3m ha of land.
Another Chinese grand plan was to cultivate jatropha
for bio-fuels on over 2mn ha in Zambia. Again, no
progress was registered on either project. Hyperbole
is not restricted to land alone – another common
refrain in recent years was that China would send 1mn
farmers to settle in Africa.
Roads to be travelled
A similar scenario played out in Ukraine. There were
reports last year of China, via state-owned companies,
leasing 100,000ha of land in Ukraine for farming and
that the area could potentially expand over 50 years to
3mn ha – or about 10% of Ukraine’s arable land.
Ukrainian agricultural firm KSG Agro, which was
supposed to be the counterparty, denied those reports
saying that the agreement was with regard to the
transfer of irrigation technology for a mere 3,000ha.
Finally, there is Latin America. While China imports
large quantities of soybeans from Brazil and
Argentina, its direct involvement remains limited.
There have been no acquisitions of farmland and it is
also unlikely change in the near term, given the
restrictions imposed on foreign land ownership in
Brazil and Argentina – itself is a response to growing
Chinese interest.
The same is true elsewhere; whether Australia, New
Zealand, the Philippines and so on. The conclusion we
would draw is that China may pursue this strategy but
it is likely to remain small scale in the medium term.
Deals involving millions of hectares, or even hundreds
of hectares invariably generate hostility and local
resentment. More importantly, large-scale projects
remain difficult to execute successfully – there are
numerous examples in Africa, where companies have
hardly progressed beyond acquiring a large parcel
of land.
That doesn’t negate an alternative strategy: the
possibility of China acquiring strategic assets along
different points of the value chain. That is, instead of
acquiring land, buy elevators and processing facilities,
or provide financing and logistics services. These were
the intentions behind State-owned Chongqing Grain
Group’s plans in 2011 to build a soybean-crushing
plant, railway line and a storage and transportation
hub to export goods back to China – with an
investment of over US$2bn. However, as with other
large Chinese agricultural projects, this too has yet to
materialise. But the wider strategic argument
remains valid.
PwC  23
China’s agricultural challenges
In February 2014, China’s largest grain trader, state-owned COFCO, acquired a 51% stake in Dutch grain trader
Nidera, which has a strong procurement platform in Brazil, Argentina and Central Europe. In April 2014,
COFCO acquired a 51% stake in Singapore-based Noble Group Ltd’s agribusiness unit for US$1.5bn. COFCO
aims to form a joint venture to link its grain processing and distribution business in China with Noble’s grain
sourcing and trading business. Noble’s agribusiness unit includes sugar mills in Brazil, grain elevators in
Argentina, and oilseed crushing plants in China, Ukraine, South Africa, and South America. Co-incidentally,
China Investment Corporation – China’s sovereign wealth fund – already owns a 14.1% in the Noble Group.
With these acquisitions, COFCO will be able to purchase soybeans from Brazil and other producers directly,
bypassing the ‘ABCD’ quartet of grain traders: ADM, Bunge, Cargill and Louis Dreyfus.
Other similar deals include the previously mentioned WH Group’s purchase of US-based Smithfield Foods,
China Fishery Group’s purchase of Peruvian fish exporter Copeinca ASA, and COFCO’s purchase of Australian
sugar producer Tully Sugar. China’s US$3bn loan-for-grains deal with Ukraine was another although China
recently sued Ukraine for the breach of this contract and which will be complicated still further by ongoing civil
unrest in the country.
Roads to be travelled
PwC  24
China’s agricultural challenges
About PwC
Global Agribusiness Network
PwC has been supporting the global agricultural sector at a corporate, NGO and government level for many
years. During this time, we have built up a detailed and practical understanding of how agricultural systems
around the world work. Resources around the world include Agribusiness service centres in Brazil and
Argentina; Agribusiness practices in India and the MENA region and Agribusiness heads in every major region.
We have helped at least four different governments formulate comprehensive food security strategies. We also
have a dedicated, global food safety advisory team. In China, for instance, Assure Quality and PwC New Zealand
signed a collaboration framework agreement with China Mengniu Dairy Company and COFCO Corporation to
investigate the development of a China- New Zealand agribusiness service and Food Safety Centre of Excellence
in China. Do feel free to contact us for further details.
China Business Group
PwC UK’s China Business Group is a dedicated team of bilingual specialists who can provide in-depth
knowledge of the markets, culture, legal systems, tax, accounting, auditing and regulatory framework in both
the UK and China.
Together with our rich industry knowledge and working with our colleagues in PwC’s global network as
necessary, we provide hands-on, practical assistance to Chinese companies looking to expand in to the UK or
eurozone and Africa, as well as UK companies wishing to develop their operation in China.
We provide thoughtful, bespoke services which support our clients’ development strategies, wherever in the
world those ambitions may take them.
PwC Contacts
If you would like to discuss any of the issues raised in this report, please contact:
Richard Ferguson
Agriculture Advisor to PwC
M: +44 (0) 7880 827282
E: [email protected]
Roads to be travelled
Suwei Jiang
PwC Partner, China Business
Group
T: +44 (0) 20 7804 9248
M: +44 (0) 7932 007128
E: [email protected]
Mark James
Ross Jackson
Global Agribusiness Coordinator
PwC Senior Manager, Risk
Assurance
M: +44(0)78038 58721
E: [email protected]
T: +44 (0) 20 7804 1874
M: +44 (0) 7725 633465
E: [email protected]
PwC  25
This publication has been prepared for general guidance on matters of interest only, and does not constitute professional
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